GXO Logistics, Inc.

Welcome to GXO's fourth quarter and fiscal year 2021 earnings conference call and webcast. My name is Paul and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note that this conference is being recorded. Before the call begins, let me read a brief statement on behalf of the company regarding forward-looking statements the use of non-GAAP financial measures, and company guidance. During this call, the company will be making certain forward-looking statements within the meaning of applicable securities law, which by their nature involve a number of risks, uncertainties, and other factors that could cause actual results to differ materially from those projected in its forward-looking statements. A discussion of factors that could cause actual results to differ materially is contained in the company's SEC filings. The forward-looking statements in the company's earnings release or made on this call are made only as of today and the company has no obligation to update any of these forward-looking statements except to the extent required by law. The company may also refer to certain non-GAAP financial measures as defined under the applicable SEC rules during this call. Reconciliations of such non-GAAP financial measures to the most comparable GAAP measures are contained in the company's earnings release and the related financial tables are on its website. unless otherwise stated, all results are reported on this call are reported in United States dollars. The company will also remind you that this guidance incorporates business trends to date and what it believes today to be appropriate assumptions. The company's results are inherently unpredictable and may be materially affected by many factors, including fluctuations in global exchange rates, changes in global economic conditions and consumer demand spending, labor market and global supply chain constraints, inflationary pressures, and the various factors detailed in its filings with the SEC. This guidance also reflects the company's estimates to date regarding the impact of the COVID-19 pandemic on its operation. It is not possible for the company to actually predict demand for services, and therefore its actual results could differ materially from the guidance. You can find a copy of the company's earnings release, which contains additional important information regarding forward-looking statements and non-GAAP financial measures in the investors section of the company website. I will now turn the call over to GXO's Chief Executive Officer, Malcolm Wilson. Mr. Wilson, you may begin.

Thank you, Paul. Good morning, and welcome to GXO's fourth quarter and full year 2021 earnings call. With me here today are Barish Oran, our Chief Financial Officer, and Mark Manduka, our Chief Investment Officer. In the fourth quarter, our operations again delivered the highest quarterly revenue and adjusted EBITDA in our history. We delivered double-digit organic revenue growth in every quarter of 2021. We finished the year with an accelerating trajectory growing at 19%. Moreover, we see great momentum as we have progressed into 2022. As a result, we are raising our 2022 guidance. We delivered a successful peak for our customers during the fourth quarter, and we played our role in delivering holiday cheer for millions of consumers. We managed the labor market exceptionally well, including recruiting over 20,000 new team members. And we navigated an elongated peak period that ran from mid-November to late December. We helped our customers manage the ongoing e-commerce channel shift with online spend up double digits. It's worth highlighting that through the Thanksgiving weekend, our overall e-commerce activity levels were up 100% from the start of the quarter, and some of our sites handled over half a million outbound e-commerce units per day. GXO continues to capitalize on the strong secular tailwinds of e-commerce, automation, and outsourcing. In 2021, we won contracts with an aggregate lifetime value of approximately $5 billion. This gives us a strong foundation to achieve our 2022 organic revenue growth target of 8% to 12%. And this growth is on an already record 2021 year. Recent and notable customer wins and expansions include Abercrombie & Fitch, ASOS, BT, Carrefour, Curry's, Kingfisher, Raytheon, Saks, and Zalando. It's worth noting that two of our recent large UK technology wins, BT and and Curry's are first-time outsourcing partnerships. These wins are a direct benefit of the new technology verticals that we gained through our 2021 acquisition in the UK. Our sales pipeline at the end of the fourth quarter reached a new record level at $2.5 billion, and half of these opportunities are within the e-commerce sector. Approximately 60% of our revenue comes from customer relationships that span multiple countries, and over the course of the year, we were able to expand our operations with 80% of our top 20 customers. At GXO, we believe that being a leader in logistics means making sure we take care of our partners, people, and the planet. GXO is bringing significant environmental benefits to customers through our pioneering work on ESG solutions that increase order precision, optimize stock levels, reduce packaging, and streamline the consumer returns process. For example, our reverse logistics revenues were up 28% year over year in the fourth quarter, and this is indicative of our vital role in the circular economy, as we help to reduce the carbon footprint from the global supply chain. We're looking forward to updating you on our progress towards achieving our industry-leading ESG targets that underpin our AA MSCI ESG rating when we will publish our inaugural sustainability report in the second quarter. I'm extremely proud of our team's stellar performance in 2021. Our combination of world-class people, global scale, and industry-leading technology is delivering increasing value for customers and shareholders. Given our strong results and continued confidence in our growth, we'll be providing long-term expectations at our Capital Markets Day later this year. I will now hand the call over to Baris. who will take you through GXO's fourth quarter and full-year financial performance. Baris, over to you.

Thank you, Malcolm, and good morning, everyone. 2021 has been a year of records. Record revenue, record EBITDA, and record EPS. In the fourth quarter, we generated revenue of $2.3 billion, net income of $56 million, and adjusted EBITDA of $167 million. Our organic revenue growth was an impressive 19% in the quarter, the highest for any quarter last year against our toughest quarterly comparison. For the full year, we generated revenue of $7.9 billion, net income of $153 million, and pro forma adjusted EBITDA of $633 million. Our return on invested capital has surpassed 30%, a level we expect to exceed looking forward. This full year's revenue represents a year-over increase of 28% and is up 15% on an organic basis. with M&A contributing 10% and FX contributing 3%. Don't underestimate what we are achieving in terms of absolute growth. In dollar terms, that 28% increase is equivalent to the prior year sales of our largest European pure play competitors. In 2021, Revenue from our top 20 customers grew organically by approximately 22%, demonstrating the success of our land and expense strategy. When the largest brands in the world want to directly reach consumers via e-commerce, GXO is their partner of choice. Moving to earnings. Our 39% growth in full-year adjusted pro forma EBITDA reflects our strong revenue growth and our high quality contracts that enable us to pass through labor costs in an inflationary environment. Our business is naturally a high inflation hedge. Our full-year adjusted pro forma EBITDA growth was 73%. Our cash flow from operations for the full year 2021 was $455 million. We spent $250 million in CapEx. Specifically, we dedicated half of our total CapEx to automation, technology, and software. As we continue to lead the industry in tech implementation, digitization, and robotics. We generated free cash flow of $216 million for the full year, which converted about 30% of our adjusted EBITDA. Our fourth quarter free cash flow was $137 million, which reflects our rigorous cash collection processes. Turning to the balance sheet, We are committed to maintaining our investment-grade credit rating. We finished 2021 with net debt of $628 million. Our leverage ratio is one time, which is in line with our previously discussed net long-term leverage range of one to one and a half times. And for additional flexibility, we also have an available $800 million of revolving credit facilities. Our balance sheet strength is very important to our customers and gives us great optionality for future growth initiatives. I'll now turn the call over to Mark.

Thank you, Baris. We've talked before about the three megatrends of automation, e-commerce, and outsourcing. And it's very clear from our fourth quarter results that these continue to propel us forward. Never before has the case for automation been so compelling. Automation provides reliability and massive operational benefits for our customers, and also an improved working environment for our team members. GXO leads the marketplace in automated solutions. And in 2021, we deployed more than 2,000 new pieces of technology across our sites, up nearly 100% year over year. Our use of goods-to-person systems was up over 100% year-over-year, and our use of cobots grew over 200%. Now, to give a real-world example, in one of our recent expansions in the grocery vertical, traditionally viewed by many as a lower-tech, more manual environment, we're deploying cobots here that will drive a game-changing 70% uplift in cases picked per hour. And this is just one of many, many examples of how we're using tech to drive efficiency and higher and higher return on invested capital. Now, the industry as a whole has yet to embrace technology to the same degree as GXO. We really do have a first mover advantage, but we're not stopping there. We're currently testing 200 new technologies from around 100 new suppliers. We also have 1,000 tech experts that specialize in bringing together best-in-class technologies. The deployment of technology underpinned our record quarter. And going forward, it's helping us drive more value-added solutions across an increasing number of verticals. And this, in turn, we believe will fuel many, many years of future growth here at GXO. Now moving to Econ. In e-commerce, we benefited in 2021 from persistent, strong, secular growth versus tough year-over-year comparisons. Our e-commerce revenue increased some 45% year-over-year in the quarter, markedly accelerating from the third quarter. And we're also now seeing return volumes continue to rise into 2022, Our e-commerce expertise is clearly well-recognized, as evidenced by our wins that Malcolm mentioned, including Abercrombie & Fitch, where we're deploying a cutting-edge goods-to-person robot solution, and Sachs, which is a valued and growing customer for our GXO Direct flexible fulfillment solution. And then thirdly, on outsourcing, the runway here remains significant. with a massive potential addressable market of $430 billion, of which $300 billion is yet to be outsourced. In 2021, roughly 36% of our wins came from new outsourced contracts, which was a year-over-year increase of over 25%. Now, as Malcolm mentioned, we're confident about our 8 to 12 percent organic revenue growth rate for 2022. This range is the amalgamation of growth from existing customers and net new customer wins. And on that latter point, on net new customer wins, what really gives us confidence here is the fact that we've secured contracts with approximately $830 million of brand new gross revenue uplift for 2022. This is basically the equivalent to a gross revenue growth rate of approximately 10%, even before we consider the opportunity from further wins from our e-commerce heavy $2.5 billion pipeline or any growth from existing customers. And of course, on top of those gross win announcements, you should know that our revenue retention rate since the spin has risen to the mid to high 90s. And on a final note, it's worth highlighting that the industry around us is clearly consolidating, as technology and scale drive natural selection. In the last couple of years, warehousing has been recognized as a critical piece of the value chain and the consumer experience. And as a result, we're seeing more and more M&A in our space. Let's be clear, we are very well positioned to play a role in the consolidation of our industry. And if you look back at our recent UK acquisition, we've already realized over $30 million of synergies, which is the equivalent to 5% of the target revenue, and really speaks volumes to our ability to smoothly integrate acquisitions much to the benefit of our all-important shareholders. As we've said before, GXO is a rare breed of company, which combines high revenue growth, high returns, and high visibility. We delivered compelling double-digit revenue and adjusted EBITDA growth in 2021. And this will be, importantly, the basis for our North Star that we're going to share with you at our Capital Markets Day later this year. I'm now going to hand the call back to Baris to discuss our outlook for 2022. Baris.

Thank you, Mark. Our strong 2021 performance and record pipeline gives us increased confidence for fiscal 2022. In light of all these results and our visibility into the year, we have upgraded our full year 2022 guidance. We anticipate another year of strong revenue growth in this high return invested capital business. We are exceptionally busy in the first quarter as we implement new wins. We are now forecasting 8% to 12% organic revenue growth alongside an adjusted EBITDA of $707 million to $742 million, and adjusted EBITDAR of $1.5 to $1.6 billion. There are two positives that I would like to highlight with regard to our value creation. First, in 2021, the growth within the business skewed toward high return on invested capital open book contracts. This helped us achieve our higher return on invested capital over 30% in 2021. One benefit of having more open book contracts is that we see lower asset intensity across the business. This results in a margin dynamic where Adjusted pro forma EBITDA margins increased by 60 basis points in 2021 versus 2020, while adjusted pro forma EBITDA margins increased by 120 basis points. In 2022, we expect a similar dynamic between EBITDA and EBITDA. We had a strong working capital performance in Q4 of 2021. This drove our robot free cash flow results, with us converting more than 30% of our adjusted pro forma EBITDA. This underscores the strength of our business model, which delivers high returns, cash flow, and growth at the same time. Given these dynamics, I'm pleased to announce that, we will be targeting a return on invested capital in excess of 30% on an ongoing basis for the business. All in all, the record fourth quarter that we have delivered to you today is a precursor of more records to come. We'll now open the call up to Q&A.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

One moment please while we poll for questions. Thank you. Our first question is from Chris Weatherby with Citi.

Please proceed with your question.

Hey, thanks. Good morning, guys. Maybe I could start on the revenue guidance. So, Mark, as you noted, I think there's a pretty robust backlog that you guys have that accounts for some pretty significant growth already for 2022, book through February. You have a fairly robust line of sight, and I would imagine that the backlog isn't necessarily going to stop here in the first quarter. It probably will continue to grow. So can you talk about sort of the confidence interval around that 8% to 12% revenue growth target? Why can't you be at the upper end of that, or maybe potentially better, particularly considering it sounds like the attrition of customers is really trending lower?

Yeah, good shout, Chris. It's Mark here. So a couple of things. Let me talk about the 8% to 12% organic revenue growth rate, as you mentioned, and why we've kept it from a percentage perspective the way it is. But the first point is really that the base is higher. So implicitly, we're actually upgrading in absolute terms the revenue guidance range by nature of the fact that we've obviously got a percentage number on a higher base in 2021. The second point is we've got great visibility in this business, as you know. And the We're sitting here in February, obviously, with e-commerce comps in the second half of the year getting markedly tougher. Now, for a business like ours, as you know, we've done better as the comps have got harder over the course of Q3 and Q4. But I don't think at this stage, sitting here in February, getting ahead of our skis so early on in the year is necessary. On the third point, talk about this confidence in regards to the 8% to 12%. Let me give you a breakdown of it so we fully understand it. The range here is the amalgamation of growth from two forces. One, as you say, is the existing customers, which is the 3% to 4%. And two is the new customer wins, the net new customer wins of 5% to 8%. So within each of these buckets, the 3% to 4% and the 5% to 8%, there are knowns and unknowns. On the 3% to 4%, we've been tracking mildly ahead of that in Q3 and slightly ahead of that as well in Q4, largely as a function of inflation. So the unknown is what's your view on inflation going through the course of 2022. But volume and inflation have both been tracking well so far against that 3% to 4%. And like I said, tracking slightly ahead of that range. When it comes to the 5% to 8% from new customer wins, there's two things to keep in mind. One is the gross revenue uplift that we've had, which is the $830 million of gross revenue uplift. That, as you know, translates to a gross revenue growth rate of some 10%. But the bits that is the unknown is obviously this retention rate, And as you know, we've been improving that. The revenue retention rate has improved since the spin to the mid to high 90s. That's the bit that's unknown within that calculation. I think you made a really, really good point in your question as well, which is there is potential to have further wins above and beyond the gross revenue growth rate that's already banked of 10% through the course of this year. I would view it as in the window between January and April, where we'll still be able to get some revenue that hits in this year. And if not, it falls into 23 and 24, which talks to the durability of and visibility of this business. But you can see if you add all those numbers up, you get very comfortably within the 8% to 12% range. That underpins our confidence in that range, and that's why we've reiterated the guidance today.

That's super helpful. I appreciate the color there. And then maybe, Baris, maybe a little bit of help on the margin outlook for 2022. So same revenue growth, but obviously off of a higher base. So revenues are going up relative to what our expectation was a couple of months ago. adjusted EBITDA is also going up, but arguably at a little bit of a slower pace there. And I know you mentioned some dynamics between EBITDA margins and EBITDA margins. Can you talk a little bit about what you're seeing, whether it be from an open book perspective around the cost profile of the new business wins, and if there's anything changing there that we should be thinking about in terms of that ultimate adjusted EBITDA margin for 22? Sure.

Regardless of whether you're looking at EBITDA or EBITDA margins, you should expect a margin improvement year over year in 2022. We will have the annualization of our acquisition as well as costs associated with being a standalone enterprise. And beyond these factors, we will see underlying margin expansion driven by our improved mix relating to higher margin automated contracts. As far as the seasonality of the margins are concerned, we are very busy. We have a lot of startups right now. And you will see the startup activity particularly pronounced in the first half of the year. And the impact on that on revenue EBITDA will be spread out throughout the year. So you should see this expansion throughout the year with all these drivers getting into accounts.

So I'm clear that should be in the neighborhood of maybe 30 to 50 basis points of type of sort of full year EBITDA margin improvements or any sort of parameters you can put around that?

If you take the midpoint of our guidance, that's what we have guided for. But you should have a higher EBITDA margin expansion compared to an EBITDA margin expansion.

Okay. That's helpful. Thanks for the time this morning. I appreciate it.

Thank you. Thank you. Our next question is from Scott Schneeberger with Oppenheimer. Please proceed with your question.

Thanks very much. Good morning, all. I just want to delve in a little bit about the new contracts, one, and talk about automation. You have this 30% company average you speak to in Europe. I think it's similar in North America. Just curious how the new contract wins What type of mix is automated? I assume much higher, but if you could elaborate on that a little bit. And where could that 30% go in time, just to get perspective on how quickly that could move? Thank you.

Hi, Scott. It's Malcolm. Overall, pretty much in everything that we are implementing nowadays, there's a degree of automation. And also, you've got the dynamic where we're going back into historically less automated business, and we're adding newer automation. So collaborative robots, goods-to-person robotics, robotic arms, these are very easy to add back, and they deliver very speedily improvements in efficiency, improvements in productivity. And going back to Baris's comment, that's one of the reasons why we have our confidence levels on margins. So overall, that's the environment that we're seeing. We'll see a steady increasing path for automation. But not to lose sight of the fact that our business still has a large incumbent workforce, 100,000 very valuable team members. They're very valuable in our business. And so it really goes hand in hand. But overall, you'll see a steady increasing level of automation across the business.

And Scott, was there a second part to your question about recent contracts we've stood up and the benefits that we're applying to customers?

Yeah, Mark, yeah. Go ahead on that. Please, I had a follow-up too.

So we've done a number of different things on the customer side, Scott. Just to give you an example, we obviously talked on the call about a grocery vertical where we were improving things with the technology that Malcolm talked about. But there are multiple examples throughout 2021, and I'll give you one as a standout. In a solution that we recently stood out for a well-known e-commerce customer, we have reduced the variable cost by 40 percent per unit via our technology. We've reduced the inventory stock units by some 40 percent. And perhaps most importantly, we've helped them to deliver a 45 percent uplift in their net promoter scores. That's one of multiple examples of how we help our customers and why they come to the scale technologically proficient player in the space.

Excellent. Thanks, Mark. That sounds like a great proposition for the customer. I want to touch on reverse logistics as well since we're coming off peak season. The growth there, 28% year over year, very strong. I just wanted to talk about how that's going to carry into first quarter, what you're seeing, and the potential for that growth remaining elevated. Thanks.

Yes, Scott. Reverse logistics is growing at a very fast pace. You're right, 28% in the fourth quarter, and that's accelerating. We're expecting similar high levels, even higher levels of growth through 2022. What's happening is customers typically, we're expanding the services that we have with customers. And reverse logistics is a real typical service where when we're operating for the first time with a new customer, and remember of our business wins in 2021, which shouldn't be so different in 2022, you've got broadly around 36% coming from brand new outsourcing projects. And typically for an e-fulfillment customer, for example, We start with the e-fulfillment, the outbound process, the stock holding, and then we gravitate. They generally ask us to then take over returns or activity or repair activity that they might be doing in-house at the present or alternative with another competitor. So returns definitely is increasing exponential across the rest of the business. We're really good at it. We've got great tech that we deploy in it. It's super efficient. It's touching the customer, so it's really very vital for our customers, and we're very pleased that that part of our business is growing very well.

That's great. Thanks. I'll turn it over.

Thank you. Our next question comes from Amit Mehrotra with Deutsche Bank. Please proceed with your question.

Thanks, operator. Hi, everyone. Congrats on the results. I guess I just wanted to come back to Chris's question on the profitability really quickly. So I know you guys manage the business on a ROIC basis, not margins necessarily. But, you know, at least from our perspective, it's just helpful to understand how the EBITDA growth compares to revenue growth over a sustainable period of time. And I think that would be helpful to just get your philosophy around that because obviously you're putting together this five-year plan. I just want to understand, is it the right assumption under this business model to assume kind of EBITDA growth that's consistent or maybe even a little bit better than revenue growth? Because that's what the case is in 2022 with respect to the guidance. I just want to understand philosophically that's the right way to think about it.

Yes. In 2022, we are guiding for an EBITDA margin expansion. And on top of that, we are providing an EBITDA margin expansion above the EBITDA margin expansion. And as you rightly said, we're writing contracts for return on invested capital, and we have surpassed 30% return on invested capital this quarter. And that will be our minimum target moving forward.

Okay, I want to talk, I'm going to get into, I'm going to return on, I'll get into ROIC in a second. But Baris, the Kuninago acquisition, I think that closed very early in 21, was obviously pretty dilutive to margins in 2021, right? What would have the EBITDA margin been at the Kuninago acquisition for the entire 2021? So we should get a little bit better of a better, you know, compare and contrast versus 2020. Sure.

For Q4, there has been a margin degradation coming from the impact of Kuninago acquisition around 100 basis points. Again, for Q4, we saw exceptional growth in our open book contracts, second point. and which brings us higher EBITDA margins, but lower EBITDA margins as they are less kept in census. And when you look at the acquisition itself overall, we have been integrating quite well. Despite the COVID environment, we have been able to realize over $30 million of synergies through this acquisition. And you will see the full year impact of that in 2022.

Right. And so just so I understand, so what you're saying is that... Yeah, I'm sorry. Go ahead.

Well, I was just going to add to Baris's comment, Amit. It's Malcolm. If you imagine that deal, roughly half of that business is operating already at quite similar margins to the rest of our UK activity. And in fact, it's growing like a rocket. And, you know, two of those recent big open boot contracts, one with Curry, the very significant sized tech retailer in the UK, and more latterly, just announced this week, British Telecom, 10-year deal. Those are coming out of the technology vertical that came. We really wanted that vertical in our UK business. The flip side of that is 50% of it deals with the hospitality industry. And For sure, through 2021 and even into quarter four, that was a little bit down, really primarily coming out of the pandemic. Thankfully now, certainly in the UK market, we can see all the signs of Omicron really reducing. You know, government recently announcing removal of most of the remaining limitations. So we're really expecting that business to come good and fly, you know, during the rest of 2022.

And to Malcolm's point about as we move out of the Kununagal annualization into 2022, this business is deserving of margin expansion. It's not how we write contracts naturally. We've had that conversation before, obviously. But returns is how we think about this business. But margins are the natural output of that. And it's going to be margin expansion, obviously, as we continue to write great contracts. This business will see margin expansion largely because of automation. Automated contracts versus non-automated contracts have roughly 300 basis points better margins. That, therefore, is the flywheel that we're talking about here. Continue to write great contracts at great returns, and amazing free cash flow and amazing margins come out the other side.

Right, and that's very helpful. Just as a follow-up, the return on invested capital, I appreciate the calculation you presented in the presentation. I guess I think about things more on like an incremental return on incremental capital. And what was interesting to me, and I want to get your thoughts on this, Baris, is that the invested capital base actually shrunk sequentially because of the cash that you're generating. And obviously that's super interesting to me because I want to understand the trajectory of the invested capital base because it seems like it's shrinking while the earnings are growing, which obviously – allows you to grow the absolute, like the incremental returns on capital are much higher than the absolute, and if you could just talk about that.

We are basically looking for three-year cash-on-cash payback, then we write contracts. So I give $100 to my operator, I expect about $30 back every year. So that's what we're writing these contracts for, for an average about five-year contract. Now, coming back to your question around cash generation, It has been an extraordinary quarter of cash generation, and we have performed very well in the cash collection process in Q4, and that has resulted in accumulation of cash. And numerically, you're right, that will reduce our net debt base moving forward as we generate further and further cash throughout the year.

Okay, thank you very much, everybody. Appreciate your time.

Thank you. Thank you. Our next question comes from Stephanie Moore with Truist Security. Please proceed with your question.

Hi, good morning.

Good morning.

I wanted to touch on cash flow generation. Just sitting here, nice cash balance, a lot of recent contract wins are not requiring as much capital deployment as others. Let me just talk a little bit You know, first about investments internally, whether it's a new technology or software, and is there an opportunity to accelerate some of those investments here, just given the cash balance, as well as from an acquisition standpoint. You know, obviously you talked earlier, Mark, you mentioned the consolidation opportunity, but if you could dig a little bit deeper, if there's particular assets or geographies that you would be targeting just as you consider to expand inorganically. Thank you.

Thank you. We have about $2.5 billion of pipeline and we are generating over 30% of return on investment capital. Therefore, our organic growth is naturally our number one option. And our number two option is to continue to invest in our technology, not only in our new business, but to improve the productivity of our existing businesses, where we have returns framework ranging from six months to a couple of years. And after that, After these options are extinguished, we're also looking into inorganic growth opportunities where the buy companies expand them faster than they would have done on themselves, cost some additional value-added services, get expertise in new verticals, just like we have seen in our acquisition in 2021. Through this combination, we can scale them up and we can generate faster value acquisition. On top of this, on our tech, we will continue to be a differentiator, and we will have a larger base, and the last option will be, over time, returning capital back to shareholders. That will be our last option.

Great, thank you. And then I think an excellent point of this business is just the visibility you have into out-year revenue. I think the visibility, obviously, in 2022 is quite high, but could you talk a little bit about, as you think, to 2023 and 2024 and the visibility you have, just given the new contracts in place as well as the pipeline?

We will hold our capital market day later this year, and during the capital market day, we will give you more midterm targets. We have been a public listed company for seven months, but we have been generating return on investment capital well above 30% now. And in this high-return business, we have been growing our revenue over 17% CAGR since 2002. And we will formalize these targets, and you will see targets around revenue, operating profitability, and cash flow in our capital markets today. We will be able to provide you further long-term targets at that date.

Got it. All right. Well, that's it for me. Thank you.

Thank you.

Thank you. Our next question comes from Brian Ostenbeck with JP Morgan. Please proceed with your question.

Hey, good morning. Thanks for taking the question. So, Barish, maybe to follow up on the free cash flow, you mentioned the strong cash collection in the fourth quarter. outperforming the guidance for the full year. Is that 30% which you still kept for 2022, given all the dynamics you talked about with the shifting contract structure, is there any visibility to maybe outperforming that on a longer term basis when you look at that 30% conversion number that you just posted above in the fourth quarter? Is that sustainable, just given how some of the contracts are changing going forward here?

Yes, we had a phenomenal free cash flow conversion in the quarter, and our guidance is for the entire year around 30%, and we think that's achievable. We have achieved really good cash collection in Q4, and we will continue to do that throughout the year.

Okay. Should we expect a drop-off in the first quarter? I know there's normal seasonality and bonuses. So I guess is that more timing, or is that more structural? the improvement in the fourth quarter?

You should expect 30% for the entire year. Just like many listed companies in the U.S., we pay our bonuses in the first quarter. Therefore, the first quarter cash flow generation will be impacted from that. About the 30% rule of thumb is valid for the entire year.

Okay. And then just a quick follow-up. If you can just give us an update on GXO. direct both in the U.S. and plans for potentially expanding into Europe. I would think that's a pretty, well, it always has been a pretty interesting offering, but I imagine just given the strong demand you're seeing that there's probably even a bigger pull from the market. So maybe an update on the size and growth potential in the U.S. and Europe.

Hi, Brian, it's Malcolm. And you're absolutely right. It's downward growth opportunities for us on GX or direct. So in our 2021 numbers, The win rate for customers was over 40%. Revenues were up 32%. I mean, it's really a business that's super appealing to customers. The opportunity for them to place inventory very close to the consumer is really exceptionally interesting and attractive for them. So we're growing at a great pace here in North America, so much so that also we've got big demands now showing customers in Europe, and we definitely have a plan, and it'll be one of the things we'll talk about on the Capital Markets Day, but we're planning to roll that system, the IT softwares, the process of how we manage where best to place the inventories for our customers, we're rolling that out in Europe, and we've got really, we expect it to grow just as quickly across our European landscape. It's a real winner. for GX, so we're very, very excited about it. And all the customers that we're supporting are equally very excited.

Okay, great. Thank you, Malcolm. Thank you. Our next question comes from Hamza Mazzari with Jeffrey.

Please proceed with your question.

Hi, this is Mario Cordolacci filling in for Hamza. Really appreciate you guys laying out the drivers of that 8% to 12% and kind of how you get there with, I guess, retention being the biggest piece of the unknown. What drives better retention going forward? What has changed in your business over the past year? And what other tweaks can you make over the following year to help drive that retention even higher, which obviously drives your organic growth even higher?

It's Malcolm here. Let me comment on that. I mean, that really goes back to partly the old ethos of the spin. It allows us to focus all of our attention on what happens in the warehouse and the customers that are in the warehouse. So what you're seeing, that elevating level of retention, is really just that we're so focused, laser focused on our customers that The other aspect about the retention is customers are seeing that GXO is super reliable. You know, when we say we're going to implement, we implement. We implement on time. We're bringing lots of tech innovation enablement into the works. And that's driving efficiency. It's driving productivity improvements. quality improvements, accuracy, and not least also safety in the warehouse. So all of those things, when you put it together, is improving our customers' consumer experience. So that's why customers are more locked to us, they're sticky to us, they're wanting us to do more and more business. You know, 30% of our new activity in 21, and I don't believe it will be any real difference in 22 or the go-forward, is coming from expansion of services with our existing customers. They're asking us to do more and more. So that's, I think, a really strong indicator that our customers value GXO. We can all say, again, you know, the pandemic served to demonstrate to every one of us just how critical what happens in the warehouse is. As soon as it's coming into the warehouse, you know, last year we had all those supply chain disruptions, all those... delays or at the ports, as soon as it comes into the warehouse, customers are just so needing in terms of our ability to turn that process around reliably and get those products to consumers. That's what's driving the high levels of retention. I don't think it's going to change going forward.

And Mario, to Malcolm's point, what really strikes me, having been at this business for seven months and far more of a newbie than Malcolm is is the rigor of contract writing that takes place with our customers. We just have the right customers on our books, these global blue chip customers that we've talked about, who understand our offering. And within our diversified mix, I would highlight that rigor of contracting translates into landing and expanding. So our top 20 customers, if you look in Q4, we grew with them some 33% year over year, and we've expanded operations with 16 of them. It's repeat business. It's an understanding of value-added services rather than commoditized services. and it's that technological proficiency that drives repeat businesses and recycling and high retention rates. That's why it's getting better.

Got it. Thank you. For my follow-up, obviously, 90 percent organic growth is fantastic. I don't want you to think that my question is to downplay that, but I guess is there any governor on your new customer growth? Not even focusing on retention, just new customer growth that you mentioned 10% earlier. Is there any governor on that? Is there any structural reason why you can't grow that even more? Is it sales team size, integration timelines? access to robots, whatever it might be, or is it just simply a decision by you guys, the management team, to enter the right contracts at the right time? Just trying to gauge how much is self-inflicted and how much is just a structural, again, governor on growth.

Yeah, our scale, you know, largest pure play contract logistics company in the world, that's ensuring that we don't have restrictions in terms of availability of equipment and robots, deep-seated automation, robotic arms. We're top of the queue with the manufacturers because winners like to win with winners. People want their equipment working with GXO. It's a great combination. And then also for people, You know, 20,000 people we recruited in a very tight labor market in the last part of 2021. We did that because we work hard at ensuring that GXO is just a great place to work. You know, whether you're a manager, whether you're a team leader, whether you're an order picker, we work hard at ensuring that we make the company a great place to work. So in those contexts, no restrictions. What I would say is, though, and Mark touched on it, we are super disciplined about the kind of contracts that we write, the kind of customers that we work with. We could grow much higher levels of percentage, but it might not be the same quality level of business that we really want. And so I think when you put all of those things together, plus those mega tailwinds, you know, more and more people are outsourcing, e-fulfillment, growing topsy-turvy, More and more automation going to the worst. That's how you get to the kind of numbers that we're guiding to. I think we're in a very enviable position as a company, high-class quality of customers, nothing to suggest that that will change going forward, but really that's the basis of where our guidance is coming from.

Thank you very much. Thank you very much. Thank you.

Our next question comes from Brandon Oglemski with Barclays. Please proceed with your question.

Hey, guys. Thanks for taking the questions. Maybe more of a macro question about your customers. You know, we're having a lot of debates with investors about where aggregate levels of inventory sit, especially on the retail side, you know, in North America and in Europe. So anything you can speak to there and, you know, some of the momentum that you saw in your business in the fourth quarter, how do you think about that carrying forward, you know, seasonally into 1Q and 2Q here?

Brandon, I think quarter four is always a peak environment. That's a matter of fact. With our e-commerce business, it's the peak season. You've got Black Friday, you've got the Christmas holiday seasons, etc. So quarter four definitely is a peak. But we've taken a lot of that strong momentum, a lot of new contracts being implemented as we speak in our quarter one. So we've taken all that momentum into the new year. Mark, maybe you can comment further.

Yeah, I mean, in many ways, Brandon, there's an element here of being a company for all seasons. If you think about how our contracts are structured, as Malcolm mentioned, there's really a paper ceiling and a concrete floor in so many ways. We benefit on the upside from some of the e-commerce trends that Malcolm mentioned just now on the fourth quarter. But equally, with our minimum volume requirements on the downside, we're protected in a downturn, as I'm sure you saw with our prior entity of NorBear back in the 2008 and 2019 cycle. So the resiliency of our contracts, the rigor of which we're writing these contracts, really protects us in terms of belt and braces, in terms of what you're saying on the inventory side. I like what you're saying on the inventory side. It means more goods flowing through warehouses, and that's a good thing for us.

Well, I guess to the inventory situation, Mark, in North America and Europe?

In terms of the inventories going up at the moment is what you're saying in terms of building or?

Right. Are your customers at low or high relative inventory levels right now? And has that been an issue that you have been dealing with, you know, recently?

Yeah, Brandon, I think what we can say is, I mean, really the supply chain disruptions that we saw in 2021, you know, the huge volumes of vessels sitting offshore in Long Beach, that's coming down. And I mean, I think there's lots of statistics to demonstrate that's coming down. Our customers, the kind of customers that we work, large blue chips, typically source from multiple destinations on a global basis. So we're not seeing anything untoward in terms of inventory levels that we work with or plans. Obviously, we work with all of our customers in terms of long-term planning. You have to imagine we're working on projects now for 23 and 24. We're building new warehouses now. as we mentioned, saw a large percentage of our growth is coming from existing customers, incremental services. So we're working with customers now on projects into the long term. So we're not really seeing any downscaling of inventory levels, but equally, we're not seeing any upscaling of inventory levels. We're about where we would anticipate to be just after a very busy quarter four and, you know, starting the planning for the various seasonal peaks that will happen through the course of 2022.

Okay, I appreciate that. And if I can just sneak in one more on margins, because I feel there's a lot of margins that we've got to look at in your business. And I think Barish was talking about, you know, a difference between EBITDA margins and EBITDA margins. as well as potentially some startup impacts early in the year. So can you speak to, I guess, one, you know, maybe a little bit longer discussion on the difference between the depreciation on non-open contracts and then your open contracts and then seasonality of those startups? Thank you.

Sure. In Q4, generally, a lot of our operations are focused in delivering peak, as we have both Christmas and Black Fridays. And throughout the rest of the year, we are very busy with implementing new wins, especially Q1 is very busy in implementing new wins. And as we mentioned in our call earlier, we have seen a higher growth in our open book contracts in 2021 versus the other contracts we have. The open book contracts we have, they are not as capital intensive. They are asset lights compared to the closed book contracts, in a way, very sizable upfront capex is taken over by the customer. Therefore, the depreciation charge related to those contracts is lower compared to the closed book contracts. Therefore, we have seen a margin expansion year over year of 120 basis points in EBIT-A versus 60 basis points in EBITDA margins. And we're guiding for an EBITDA margin expansion for 2022 and a higher EBITDA margin expansion for 2022. Thank you.

Thank you.

Thank you. Our next question comes from Baskon Majors with Susquehanna. Please proceed with your question.

Can you talk a little bit about the specific timing of the Capital Markets Day and if you have some thoughts on that?

We will hold a Capital Markets Day later in this year. The timing will be set soon and we will be providing number of targets, including revenue, operating profits, and cash flow. We have been growing this business over 17% CAGR since 2022. And also, the guidance we provided for 2022 on organic growth 8% to 12%, we would note that this is a normal year for us. 8% to 12% is a normal year for this business. We'll get back to you with more dates rather soon.

Thank you.

Thank you. Our next question comes from Jeff Kaufman with Vertical Research Partners. Please proceed with your question.

Good morning, gentlemen. Thoughts on capital deployment. You had mentioned you will play in the consolidation game, but I think that's more of a long-term comment. But the balance sheets, kind of where you want it to be. You're still going to be throwing off 200 million plus in free cash next year. Can you just kind of walk us through, I know the priority is grow the business, but where do you need to be before you start considering return of capital to shareholders?

Our options, as you would recall, number one is organic growth. Our option number one. Number two is continue to invest in our technology to improve productivity and not only in the new business, but in the existing business. And after that, number three is looking into inorganic growth opportunities. As we have shown in the Canon acquisition, we were able to extract $30 million of synergies, roughly 5% of its target sales in a very difficult year, and we have more benefits that will accrue in 2022. And then lastly, Returning capital back to shareholders is our option number four. We are looking into multiple options as far as allocating our capital, and we will continue to provide organic growth as a priority number one, followed by tech and inorganic growth. Returning capital back to shareholders over time will be part of the options, but it will take some time before we do that, as we are very excited about over 30% growth in our, over 30% return in our organic growth options here.

It makes sense. Thank you for your answer, and that's all I have.

Thank you. Paul, I think that's where we close the call. I think we're at the full hour. I know people who have very busy diaries.

Operation closed today's conference. You may disconnect your lines at this time. And thank you for your participation.